December 12, 2024

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Korea Development Institute President Cho Dong-chul speaks during a press conference held in southern Seoul on Wednesday. (KDI)

Korea Development Institute President Cho Dong-chul expressed confidence that the recent political turmoil sparked by President Yoon Suk Yeol's brief martial law declaration would not have a lasting economic impact, despite increased volatility in local financial markets.

"It's undeniable that the recent unexpected political crisis has harmed our economy. However, I believe a severe risk, such as the foreign exchange crisis we faced in the past, is unlikely," Cho said Wednesday at a press conference at the JW Marriott in Seoul. The event was part of the state-run think tank's conference on "strategies to enhance productivity in the Korean economy."

Cho highlighted the stronger economic fundamentals supporting the markets today compared to conditions during the 1997-1998 Asian financial crisis.

"The economic landscape in 1997, both domestically and internationally, was entirely different from now. Local financial conditions were poor, and various risk factors, including corporate debt, compounded to trigger an economic crisis," Cho said, adding, "While the economy is weaker than a few years ago, it is incomparable to that crisis period."

He also underscored the significant progress the country has made in recent decades.

"South Korea now has ample foreign exchange reserves, and importantly, the country has posted a current account surplus every year for the past 30 years, with those surpluses fueling investments," Cho said. "As a result, Korea's net external assets account for about half of gross domestic product -- or roughly $1 trillion -- and it's hard to imagine such a country facing a foreign exchange liquidity crisis."

Cho also noted that market fluctuations have been contained fairly well since President Yoon's brief martial law declaration on the night of Dec. 3.

The Korean won-US dollar exchange rate has been fluctuating within 1 to 2 percent above the pre-declaration level of 1,402.9 won. On Wednesday, Korea's benchmark Kospi, which had fallen below 2,400 won Monday, recovered to around 2,430, marking a 2.5 percent decline from before the martial law announcement.

"These indicators are variables that can quickly stabilize as the situation evolves, so in terms of the indicators, the disruption has been minimal," Cho said, noting that during President Park Geun-hye's impeachment in 2016-2017, the indicators also remained relatively stable.

Commenting on the opposition-led passage of a reduced budget plan in the National Assembly on Tuesday, the economist said, "Generally, reduced fiscal spending is not positive for domestic demand," and added, "The decision on a supplementary budget next year hinges on political factors."

Regarding Korea's potential growth rate, Cho said it hovers around 2 percent, "with an undeniable downward trend."

Cho underscored that the most effective way to rapidly improve the declining potential growth rate is through regulatory reform and enhancing flexibility in the labor market.

About the impact of Donald Trump's second term as the US President, Cho said there are as many positive aspects to it as there are negative aspects, which have been highlighted recently.

"One of the greatest challenges that South Korea faces is improving productivity and driving innovation within the government," Cho said, adding, "the Trump administration's launch could be a trigger for change in our government."

He also noted that while tariff barriers are a burden for Korea, given its export-driven and trade-dependent economy, the country may benefit from an increased geopolitical value due to the US strategy of countering China.

By Choi Ji-won (jwc@heraldcorp.com)